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Michael Gracie

Why don’t Fannie Mae and Freddie Mac set off public bonus rage?

Fannie Mae and Freddie Mac, those institutions of ‘higher standards’, are preparing to pay up to $210 million in retention bonuses:

In a compensation program that has drawn angry protests from politicians, Fannie Mae and Freddie Mac expect to pay about $210 million in retention bonuses to 7,600 employees over 18 months, according to a letter from the mortgage companies’ regulator to Sen. Charles Grassley.

The maximum retention bonus for any individual executive under the plan will total $1.5 million during the 18 months ending in early 2010, according to the letter, which provides previously undisclosed details about the bonuses. The regulator, James Lockhart, director of the Federal Housing Finance Agency, said in a letter to the Iowa Republican senator that about $51 million of the payouts were made in late 2008 and that the rest are to be made this year and early next year…

“It is not realistic to expect that experienced and highly skilled employees will indefinitely continue to work as hard as they have if we do not provide reasonable incentives to perform,” Mr. Lockhart wrote. He argued that the companies need “skilled and experienced staff” to manage safely their more than $5 trillion in debt and guarantees of mortgage securities.

A few weeks ago, the public disclosure of AIG bonuses set off a firestorm – some AIG employees even had their houses vandalized. It would be nice to give credit where credit was due and pat Rep. Barney Frank on the back for denouncing the Fannie/Freddie scheme way back when, but all eyes seemed to be on AIG. They stayed there too, and one has to wonder why. Or at least had to wonder, as this news, including but not limited to the fact that a full 25% of the prospective bonuses have already been paid, was popped on a Friday. By Monday the public will have forgotten all about it, as planned.

Again, where are these specialists going to go otherwise? Same old excuses, and the same old tactics.

“For personal privacy and safety reasons,” Mr. Lockhart said, it wouldn’t be appropriate to release the names of all employees receiving bonuses of $100,000 or more.

Well at least Fannie and Freddie employees’ windows won’t be getting smashed.

AIG bonus meme roundup (UPDATED)

aig_logoAIG, that (almost) wholly-owned subsidiary hedge fund of the US Government, announced that they were going to pay millions in retention bonuses to employees of their financial products (and other) divisions. This set off a firestorm of protests, meme form which follows…

  • ON ADDING INSULT TO INJURY: Under pressure to disclose AIG published a counterparty list, and the public found out that Goldman Sachs, as well as a number of foreign concerns, took some $45 billion of the roughly $170 billion AIG was given. Folks were not particularly happy about that.
  • ON IT’S AN INHERITED PROBLEM: The bonus issue reaches as far back as early 2008, and was known about for months. The fact remains AIG continued posting big losses and the government kept shoveling money their way. And as recently as March 2nd of this year.
  • ON VOWING TO DO SOMETHING, JUST AFTER THE FACT: You can moan and/or whine all you want – the bonuses have already been paid. You can send out subpoenas too, but that’s mostly for show – there are few legal options available at this stage of the game. So, slip in that you are going to ensure this doesn’t happen during the next round of AIG cash injections. You heard it right…during the next AIG bailout.
  • ON MAKING SURE YOU ALWAYS HAVE A VILLAIN: Easy. There will always be someone around who is coaxed into thinking this is but a battle their hero is fighting. Unfortunately, the real war being waged is between the checkbooks of the citizenry and their bloodlust for granite countertops. The tacticians are only trying to convince the public they can keep the kitchen and continue dining out. While paying for neither.
  • ON TWITTER CAN SOLVE EVERYTHING: Much as Twitter doesn’t make any money (yet), the administration called on one of their founders to provide advice on the financial crisis. Lawmakers jumped on the bandwagon, using the service to discuss the AIG issue out in the open. Bonus issue (and financial crisis) still outstanding.
  • And…

  • ON THE EMPLOYEES ARE THE ONLY ONES WHO KNOW THIS CDS STUFF: You have to pay those bonuses because the folks that created the credit derivatives are the only ones who can unwind the transactions, and if they leave the whole system will come crashing down. My only question here would be: if you don’t pay bonuses to someone who created financial products that nobody wants anymore, what the hell are they going to do if you don’t pay them? Just up and quit?
  • I was once a master of the universe, conjuring financial products only I could understand. Now I work in the Goldman Sachs PR department, twittering about all the money we are lending to family restaurants and small businesses doing home renovation, and moonlighting as an auditor at the Treasury for the pension. All tax free too (or at least until my boss quits). UPDATE: Unless, that is, I do the ‘honorable thing’ at the bequest of my Congressman instead.

    Adieu.

    MORE MEME: The top recipient of AIG political contributions in the 2008 election cycle wants to tax the bonuses he ensured in the first place. I’d like to think it doesn’t get any better than this, but I’d probably be wrong by day’s end.

    Only in America folks

    From the comments section at Calculated Risk comes this summary regarding the Fed’s expansion of lending to AIG:

    Wait.. it goes like this…

    1. AIG makes bad investments
    2. Company execs make millions
    3. Stock gets wiped out
    4. Company gets wiped out
    5. Billions lost
    6. Company and execs get 85 billion bailout
    7. Execs and sales force go on $400,000 weekend retreat
    8. Congress cries OUTRAGE!
    9. We give them another 38 billion.

    That about covers it.

    Short-selling rules back in play (UPDATED)

    Bloomberg sayeth:

    The U.S. Securities and Exchange Commission stiffened rules against manipulative short-selling after a market rout pushed American International Group Inc. to the brink of collapse and triggered Lehman Brothers Holdings Inc.’s bankruptcy.

    The SEC adopted two regulations today forcing traders and brokers to close out short sales on all stocks, amid concern investors are driving down prices by flooding markets with sell orders. A third rule makes it a securities fraud when sellers deceive brokers about delivering borrowed shares to buyers.

    “These several actions today make it crystal clear that the SEC has zero tolerance for abusive” short-selling, SEC Chairman Christopher Cox said in a statement on the rules that take effect tomorrow.

    Short-selling now caused Lehman’s and AIG’s collapses? Shame on Bloomberg. Mr. Cox might also have noted that the shares of other firms were often used as bonuses, and they just couldn’t have bankers’ comp under water (as said bankers noted at last week’s meeting).

    UPDATE: CEOs of investment banks talking their book (emphasis mine)…

    Seeking to avoid the kind fate that led Lehman and Bear Stearns to collapse, John J. Mack, Morgan Stanley’s chief executive, made an unsuccessful effort on Tuesday evening to persuade Citigroup’s chief executive, Vikram S. Pandit, to enter into a combination, according to people briefed on the talks.

    “We need a merger partner or we’re not going to make it,” Mr. Mack told Mr. Pandit, according to two people briefed on the talks. Mr. Pandit, a former senior investment banker at Morgan Stanley, said Citigroup was not interested.

    When you’re making statements like that, short sellers or no short sellers, your stock is headed for the tank.

    UPDATE 2: Hmm…

    Editors’ Note [NYT]

    An earlier version of this article cited two sources who were said to have been briefed on a conversation in which John J. Mack, chief executive of Morgan Stanley, had told Vikrim S. Pandit, Citigroup’s chief executive, that “we need a merger partner or we’re not going to make it.” On Thursday, Morgan Stanley vigorously denied that Mr. Mack had made the comment, as did Citigroup, which had declined to comment on Wednesday.

    The Times’s two sources have since clarified their comments, saying that because they were not present during the discussions, they could not confirm that Mr. Mack had in fact made the statement. The Times should have asked Morgan Stanley for comment and should not have used the quotation without doing more to verify the sources’ version of events.

    Maybe the SEC should be regulating the media as well as the market.

    Fed to give AIG $85 billion loan and take 80% stake (UPDATED)

    All things considered, it sounds more like an equity investment:

    In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan.

    I suspect Hank Greenberg is very unhappy, although with roughly $450 billion in credit default swaps in play, I doubt many care how he feels.

    UPDATE: Word from the Fed:

    The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility…

    The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

    Now it sounds much more like what they were trying to do to Lehman last weekend – separate the good from the bad, and hold out a carrot for whomever wanted to invest in the bad. Only this time, the horse is the taxpaying public. Proceeds coming from the liquid assets are used to pay back the loan, and a few lucky buyers get some prizes. Then the government is left with an equity position in a business that likely still holds a toxic level of risk for which little premium will be forthcoming.

    At least it gets everyone’s mind off AIG for a few weeks.

    Who’s next?

    The day after ‘Brown Monday’

    After a chaotic weekend, Lehman filed for bankruptcy and Merrill sold itself to Bank of America. The Dow Jones Industrial Average plunged 504 points on the news (and roughly 20% of that loss occurred in the last hour or so of trading). It will forever be referred to here as “Brown Monday”. And the news is still coming.

    Today we find…

    Adieu.

    UPDATE: Almost forgot…folks are wondering whether Blackberry subscriptions will take a hit now that Wall Street has been bludgeoned. Maybe those Blackberry addicts will go back to loving their spouses?

    AIG Discloses “Weakness” in Derivative Accounting

    It may take a few quarters, but you will be hearing a lot more of this. The credit derivatives market is just too big, and grew too fast, for anyone to have a really good handle on it.

    Add AIG to the leaky sieve list

    Troubled insurer AIG doesn’t need more problems, but now it has them. One of the company’s offices was burglarized. The take? A computer with 930,000 personal data records.

    According to the report, none of the data has been put to use.

    Yet.